Is Crypto Becoming a Safe Harbor for Investors?

It is undeniable that despite the cryptocurrencies’ inherent high volatility, the industry has shown tremendous growth potential after about a 2-year long period of slump. Industry professionals are optimistic that this trend will continue into well throughout 2023, as past performance of crypto markets suggests that we are set for yet another growth phase in the cycle.

It's difficult to predict whether cryptocurrencies will become a safe harbor in 2023. However, some experts believe that cryptocurrencies could become a safe haven for digital assets in the future, especially during times of economic uncertainty or market turbulences.

Growth stymied by regulation?

Even though cryptocurrencies are still a relatively new and untested asset class, and their long-term viability and stability remain uncertain, we can be cautiously optimistic. And yes, optimism is in store, despite the concerns about security, given the high-profile hacks and thefts against some of cryptocurrency industry’s most prominent players.

Asked for his views on cryptocurrencies, Securities and Exchange Commission (SEC) Chairman Gary Gensler likes to quote the poet James Whitcomb Riley, who wrote, “When I see a bird that walks like a duck and swims like a duck and quacks like a duck, I call that bird a duck.” The point Gensler was trying to make is that he believes the vast majority of crypto projects are in fact unregistered securities. We have to keep in mind that this classification comes from a rather biased source.

Having laid out the obstacles above, it is safe to say that investing in crypto in 2023 can still be a wise decision. The crypto market continues to evolve and grow, with increasing adoption rates across most geographies and regulatory developments, like the Markets in Crypto-Assets (MiCA) initiative by the EU helping to make it a more attractive investment option.

The crypto advantage?

Overall, the jury is still out on whether cryptocurrencies will become a safe harbor in 2023 or not. It will depend on a variety of factors, including regulatory developments, economic conditions, and last, but not least, investor sentiment.

One of the unrivaled main advantages of cryptocurrencies is that they are decentralized and (still) not subject to the same regulatory controls as traditional fiat currencies or assets. This makes them less susceptible to the economic and political forces that impact standard investments.

In addition, cryptocurrencies offer a high degree of liquidity and transparency, which could make them especially attractive to investors. Keywords here are diversification and risk management – both deal-maker advantages investors seek.

Oh boy, can crypto correlate!

Furthermore, there is some evidence to suggest that there may be a correlation between the performance of the renowned S&P 500 index and certain cryptocurrencies, namely Bitcoin. This could help make cryptocurrencies become recognized as a predictable asset for investors to consider for their portfolios.

However, it's important to note that correlation does not necessarily imply causation, and the relationship between these two asset classes can be complex and multi-faceted. Cryptocurrencies are a relatively new asset class and are subject to different market forces than traditional securities. Given that, the relationship between the S&P 500 and cryptocurrencies may be subject to change over time.

Annualized Crypto Volatility - November 2021 to May 2022

Source: Investing.com

The increased correlations between the largest cryptocurrencies are part of a broader trend of increased correlations in the financial markets. Bitcoin's 90-day correlation with the S&P 500 is currently sitting at an all-time high of 0.58, while its correlation with the tech-oriented NASDAQ index is even higher.

One possible reason for the correlation between the S&P 500 and Bitcoin is that both are seen as financial instruments which can serve as a hedge against inflation. Furthermore, some investors may view Bitcoin as a speculative asset and may be more likely to invest in it when the stock market is performing well.

So, crypto is a safe haven?

There are many factors which will determine whether cryptocurrencies can be truly recognized as a safe harbor in 2023 for investors. Much of the urgency towards investing into crypto and digital assets stems from macroeconomic conditions, alongside the inherent value and utility of the cryptocurrencies themselves.

Only time can tell how the market plays out; in other words, it's the behavior and sentiment of market participants, whether investors, traders, HODL-ers or speculators, which will determine the significance of cryptocurrencies and what they represent in today's wallet.